Too Big to Fail, or Too Big to Manage?

Hi, and welcome to What’s Going On in Banking. I’m your host, Ron Shevlin, chief research officer at Cornerstone Advisors.

 

A couple of days ago, Acting Comptroller of the Currency Michael Hsu gave a speech at the Brookings Institution suggesting that banks whose size inhibits their ability to address internal weaknesses and comply with regulations may need to be broken up.

 

He said the negative impacts of “too big to manage” and “too big to fail” banks are immeasurable and can take years to repair.

 

He also proposed a four-stage framework for determining when a bank has become too big to manage. The basic logic is to use the threat of restrictions and divestitures to force banks to prove that they are manageable.

 

To help me make sense of those comments and what they could mean for banks and the broader industry, I’m joined by Rob Blackwell, chief content officer and head of external affairs at IntraFi.

 

Rob also hosts his own podcast, Banking With Interest. Many of you will remember him from American Banker, where he was editor-in-chief and, before that, Washington bureau chief.

 

Rob, thanks a lot for joining me today.

 

My pleasure, Ron.

 

What was your take on Hsu’s comments? How realistic is this framework, and what do you think the impact could be on the industry?

 

On one hand, I think it was a tremendous speech.

 

I cannot remember another comptroller coming out so directly and talking about the problem of a bank being too big to manage.

 

I was describing it to someone as arguably the biggest speech an OCC comptroller has given on that issue.

 

Hsu laid out a clear escalation framework and, at least implicitly, threatened that a bank could ultimately be broken up if management cannot solve persistent problems.

 

Before getting to divestitures, the framework also contemplates things such as replacing management or imposing other restrictions.

 

So on paper, it is a very strong and consequential speech.

 

The interesting thing, though, is that I am not sure people are taking it entirely seriously.

 

A lot of that comes back to Wells Fargo.

 

Progressives have argued for years that Wells is too big to manage and should face much more aggressive action. Their response to Hsu is essentially, “This is an interesting framework, but where was this action when you already had the opportunity to use it?”

 

So you have a strange dichotomy.

 

On paper, the speech is powerful. But progressives are frustrated that Hsu is not signaling a major escalation against Wells Fargo, and parts of the banking industry appear to be shrugging because they do not believe the OCC is about to begin forcing divestitures.

 

Is this really about Wells Fargo, or are there other financial institutions in the crosshairs?

 

I think it is probably more about the future than it is about Wells Fargo.

 

I do not know that Hsu has a specific target in mind at all.

 

You can think of it as a framework for the next Wells Fargo.

 

For a long time, Wells Fargo was viewed in Washington as a model institution. Then the phony-account scandal erupted, regulators dug deeper, and they uncovered a series of other problems.

 

The bank has since gone through major management changes and additional enforcement actions.

 

So I do not read Hsu’s speech as, “Here are the steps I am about to take against Wells Fargo.”

 

I read it more as, “The next time we encounter a situation like this, we intend to respond more aggressively and systematically.”

 

He did not mention Wells Fargo by name, and Wells Fargo wisely stayed out of the public discussion.

 

That is one reason progressive critics remain dissatisfied.

 

Senator Elizabeth Warren, for example, has said it is past time for the OCC to act more aggressively against Wells.

 

So I do not see this as a direct threat to the bank’s current management. I see it as a marker for how the OCC may approach future cases.

 

Does the OCC even have the authority to break up a bank?

 

That is a very good question.

 

One of the steps Hsu described before forced divestitures was imposing growth limits.

 

People immediately point out that Wells Fargo already operates under a growth restriction, which is true. But that restriction was imposed by the Federal Reserve, not the OCC.

 

The OCC clearly has significant supervisory and enforcement powers. Growth restrictions are one thing. Forced divestitures are a much less tested area.

 

In a situation involving systemic risk, regulators have a stronger legal framework to act, especially through Dodd-Frank and the living-will process. The Federal Reserve and FDIC have considerable authority there.

 

Whether the OCC alone could force a divestiture outside a systemic-risk situation is much less clear.

 

If you had a bank repeatedly running into internal-control problems but not posing an immediate systemic threat, I think aggressive OCC action could be challenged in court.

 

Lawyers and judges would ultimately have to sort out how far the authority extends.

 

So yes, the OCC could probably do quite a bit, particularly in coordination with other regulators. But a unilateral forced breakup would almost certainly create serious legal challenges.

 

I keep wrestling with what a breakup would actually look like.

 

Many of the largest financial institutions already operate across distinct lines of business, such as traditional banking, investment banking, and institutional trading.

 

In some cases, you can imagine separating those businesses.

 

That takes me back to the regulatory changes around Gramm-Leach-Bliley, which allowed financial institutions to combine businesses that had previously been more separated.

 

But if regulators told a bank the size of Wells Fargo to split up its banking operations, what happens next?

 

Do you create a collection of midsize banks that eventually get acquired by other large institutions?

 

I struggle to see where the benefit is.

 

You are getting to the core problem: the devil is absolutely in the details.

 

If you force divestitures, what exactly gets divested? Who buys those assets or businesses? How do you avoid creating a new set of problems?

 

Progressive policymakers have called for breaking up Wells Fargo for years, but the operational end state is rarely very clear.

 

Even if we set the legal issues aside and imagine regulators could wave a magic wand, you still have to answer what gets separated, where it goes, and who becomes the owner.

 

Those problems are manageable in theory, but they are complicated.

 

That is why I think regulators are much more likely to use other tools first.

 

Divestiture feels like a last-resort option.

 

I do think there is value in Hsu publicly acknowledging that “too big to manage” can exist.

 

Large organizations can become extremely difficult to control, and it is legitimate for regulators to ask whether management can maintain adequate oversight.

 

But I do not expect regulators to jump immediately to breaking institutions apart.

 

I want to go back to one line from the speech because it challenged some of my thinking at almost a philosophical level.

 

Hsu said the purpose of the escalation framework is to use the threat of restrictions and divestitures to force banks to prove they are manageable.

 

That made me wonder whether the real problem is not always the size of the institution. Maybe the problem is the effectiveness of the people managing it.

 

Put me in charge of Wells Fargo and I may avoid some regulatory and compliance failures, but I also cannot manage my way out of a paper bag. I certainly could not manage a multi-trillion-dollar institution.

 

So is the problem the size of the bank, or the capability of the management team?

 

I think that is a very real question, and I agree with you.

 

People listening cannot see me nodding, but I was nodding vigorously while you were talking.

 

Although divestitures create the headline, I think a large part of Hsu’s message is aimed directly at management teams.

 

The message is essentially: if the problems keep recurring and you cannot fix them, regulators will find managers who can.

 

That is why I do not think the speech is primarily a threat to Wells Fargo’s current leadership.

 

Wells has already replaced its management multiple times since the original problems emerged and brought in Charlie Scharf from outside the organization.

 

The warning is more relevant to other large institutions.

 

If the same issues keep surfacing, either management is not taking the problems seriously enough or management is incapable of solving them. In either case, regulators may decide new leadership is necessary.

 

So I think the speech is at least as much about signaling expectations to executives as it is about threatening to break up banks.

 

I also noticed that Hsu grouped “too big to manage” and “too big to fail” together.

 

Are those really the same thing? And from a legal or regulatory perspective, does the distinction matter?

 

That is another good question.

 

I would turn part of it back to you: can we imagine a bank that is too big to manage but is not also large or interconnected enough to be considered too big to fail?

 

Maybe as an intellectual exercise, but I think the overlap is substantial.

 

There may be a narrow slice of institutions that fit one category but not the other, but in practice the two concepts are closely linked.

 

A lot of this conversation is ultimately about regulators trying to show that “too big to fail” no longer means a large institution can behave however it wants because the government will always rescue it.

 

Hsu talked about warning signs such as repeatedly treating serious problems as isolated incidents.

 

Wells Fargo’s phony-account scandal is a good example. For a period of time, the organization treated thousands of employee problems as if they were a collection of bad apples rather than evidence of a broader systemic issue.

 

At some point, that explanation stops being credible.

 

If regulators conclude management is not taking the problem seriously enough, management can be replaced. If the problems continue beyond that, more structural remedies could follow.

 

So I think “too big to manage” and “too big to fail” are difficult to completely separate.

 

Before we wrap up, was there anything else in the speech that stood out to you?

 

One thing surprised me politically.

 

When I first read the speech, I thought progressives such as Senator Warren would be at least directionally pleased.

 

I did not expect a ticker-tape parade, but Hsu was moving the OCC’s rhetoric closer to where many reform advocates have wanted it.

 

Instead, he received almost no credit.

 

Warren responded very quickly by arguing that it was already past time for the OCC to act.

 

There is also a larger political dynamic because Hsu is acting comptroller rather than a Senate-confirmed permanent comptroller.

 

The administration has not necessarily shown urgency in nominating a permanent replacement, and an acting comptroller can remain in place for quite a while.

 

Some progressives have always viewed Hsu skeptically because of his Federal Reserve background.

 

So even when consumer groups or reform advocates acknowledged good elements of the speech, the praise was often followed immediately by, “But you still have not done enough about Wells Fargo,” or similar criticism involving Citi.

 

That is what stood out to me.

 

This was a significant, carefully argued speech, but the political response suggests the headlines may fade without changing how either side views the OCC.

 

Rob, thanks a lot.

 

One thing I am taking away from this conversation, which I had not thought about before, is how much the speech may have been about positioning inside Washington as well as signaling to the banking industry.

 

The substance matters, but the political context matters too.

 

Thanks for helping me see it that way.

 

And thanks to everybody listening. I hope you enjoyed Rob’s thoughts on Hsu’s comments about “too big to manage” banks.

 

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